Company sold as a Going Concern – what does this mean?

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What does it mean when a company is sold as a going concern?

When a company is sold as a going concern it means the business is predicted to be able to operate for the following 12 months with no threat of liquidation or closure. The fact that it’s regarded as a going concern is an important issue, particularly if the company has been struggling financially.

If it has had to enter administration, for example, and isn’t deemed to be a going concern, the regulations protecting staff contracts don’t apply. This means the terms and conditions of employment aren’t protected during the transfer of the company from one owner to another, and jobs may be lost.

Selling a business as a going concern out of administration can not only preserve jobs, but also offers other advantages including reducing the negative publicity that can hamper a new company’s success, and preventing extended business interruption.

How is ‘going concern’ status established?

The company’s financial statements reveal whether or not it is a going concern. Directors provide the financial facts and figures used to create these statements and reports, which are typically released on an annual basis.

The information contained must be accurate and reliable to allow for a fair assessment of the company’s position by a potential purchaser, or where an insolvent company is concerned, the licensed insolvency practitioner (IP).  

In cases where insolvency is a threat, or the company has already become insolvent, directors may decide to take formal insolvency measures to protect it from creditor legal action. In this case, it’s still possible to sell the business as a going concern if conditions are right.

Sale as a going concern out of administration

Company administration provides a breathing space for firms in financial trouble, and protects them from legal action by creditors for a defined period of time. A licensed insolvency practitioner is appointed to assess the company’s viability, and prepare a plan to exit the procedure.

One potential exit route is the sale of the business as a going concern. If this proves to be a viable option the insolvency practitioner may either sell the business on the open market, or via a ‘pre pack’ sale - albeit a potentially pared down business, but without the aspects that may have contributed to its poor financial position.

So what are these two types of sale in more detail?

• Open sale as a going concern
  When an open sale out of administration is decided upon, the business is placed on the open market. The administrator is likely to streamline the business by cutting costs prior to marketing, and making it a more attractive proposition. Selling as a going concern on the open market can expose the business to a broad range of potential buyers, but if it remains on the market for too long its value can drop.
• Pre packaged sale out of administration
  A pre pack sale typically involves the company’s directors purchasing the underlying business assets with their own funds, but the assets can also be sold to third party or trade buyers. A pre pack sale is designed as a quick process where marketing is limited compared with an open sale.

If you would like more information on the sale of a business as a ‘going concern,’ Real Business Rescue can help. We specialise in corporate recovery, and can provide professional advice for companies in all industries. Please contact one of our licensed insolvency practitioners to arrange a free same-day consultation - we operate from over 100 UK offices.